Published 4:32 pm, Friday, July 1, 2011

-- Zynga announced plans Friday to raise $1 billion in an initial public offering, positioning it to become the first publicly traded company whose profits depend on the sale of virtual goods.

The San Francisco startup - whose popular games for Facebook include "CityVille," "FarmVille" and "Empires & Allies" - did not disclose the number of shares to be offered or the price at which they would be sold.

The offering implies a valuation of $10 billion. Citing people close to the situation, the Wall Street Journal reported the IPO could raise as much as $2 billion - and value the company at $20 billion.

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In a letter to prospective investors, Zynga founder and CEO Mark Pincus said gaming was rapidly becoming a core function of the Internet and connected devices.

"Play is one of life's big macros - it's an activity people love to do and do often," he said. "Zynga was founded on a deeply held passion for games that family and friends play together - connecting, collaborating, gifting, bragging, nurturing, admiring and sometimes just doing silly stuff together."

That "silly stuff" has created serious profits for the 4-year-old company, whose popular games run primarily on Facebook's platform. In 2010, Zynga reported profit of $90.6 million on revenue of $597.5 million, according to a regulatory filing.

This year is on pace to be significantly bigger: In the first quarter of 2011, Zynga reported revenue of $235.4 million.

The healthy balance sheet could make Zynga among the largest in a string of recent IPOs that includes Pandora and LinkedIn and is expected to soon be joined by Groupon.

It has led to speculation that Zynga could acquire a more traditional video game company, such as Electronic Arts of Redwood City.

"If Zynga wanted to go out and gobble up something traditional, they're going to be in a very good position to do that," said John Davison, vice president of programming for video game news site GameSpot.

Meanwhile, Davison said, Zynga has spurred industry giants to begin adopting its free-to-play business model. Zynga, in turn, has started releasing games that play more like traditional console games.

Zynga revenues come primarily from the sale of virtual items - pink tractors for "FarmVille," or an Uncle Sam sculpture for "Empires & Allies." Users can also pay to speed up certain actions, such as planting crops or training troops.

According to the company's filing Friday, users buy 38,000 virtual goods per second.

The mostly free model has drawn vast numbers of users to Zynga. Every month, 148 million people in 166 countries play the company's games, the company said in its filing.

Many of those users are people who had never played video games before.

The company's games tend not to resonate with critics, who are turned off by their casual nature and steady requests for micro-payments. But their popularity could widen the appeal of video games within mainstream audiences, Davison said.

"A lot of gamers are very critical of it - there's a tendency to feel that it's dumbing down video games," Davison said. "But at the same time it's expanding the reach of video games. It's introducing the concept to a very broad audience, and at a level that any game publisher would kill for."

About 20 percent of the U.S. population has played a social game, of which 35 percent had never before played any type of video game, according to San Francisco consulting firm SingleGrain LLC. By 2012, 69 million people in the United States will have played a social game, SingleGrain has projected.

The rapid growth would not be possible without the continuing global conquest of Facebook, which has reportedly crossed the 700 million user threshold in recent weeks. Zynga encourages players to recruit their friends and family members on Facebook, driving viral adoption of their games.

Purchases of virtual goods within Zynga are made with Facebook Credits. For every dollar of goods sold, Facebook takes 30 cents and Zynga keeps the rest. In its filing, Zynga said that should its relationship with Facebook ever sour, the company could be affected significantly. It signed a five-year partnership with Facebook last year.

Outside projections suggest that rapid growth of the virtual-goods economy will continue. Research firm eMarketer Inc. has reported that social game revenues will grow to $1.09 billion in the United States this year, up from $856 million last year.